RBI should look to bring in reforms on asset side of banks

“Though there have been many reforms in the banking space in the last two decades, issues related to long-term financing, rising complexity of financial products with globalisation along with various sources of funding still remain. Regulators have to address these issues for long-term stability of the sector,” Member of Financial Sector Legislative Reforms Commission (FSLRC), YH Malegam said

Mumbai: Despite many reforms in the banking system over the last two decades, challenges like diversified structure of financing and complexity of financial products should be addressed for long-term stability, reports PTI. 

“Though there have been many reforms in the banking space in the last two decades, issues related to long-term financing, rising complexity of financial products with globalisation along with various sources of funding still remain. Regulators have to address these issues for long-term stability of the sector,” Member of Financial Sector Legislative Reforms Commission (FSLRC), YH Malegam said at ‘Financial Planning Congress 10-11’ organised by Financial Planning Standards Board of India here.

He, however, said Indian banks are better placed than their global counterparts as far as capital adequacy and exposure to risky assets are concerned.

The banking sector has seen various reforms like entry of new sector private sector banks, reduction of cash reserve ratio (CRR) and statutory liquidity ratio (SLR), deregulation of interest rates, and introduction of base rate among others, in the past 20 years.

“In the recent past, many of the reforms are directed towards liabilities side of the business. However, there are little reforms on the asset side. Perhaps, the regulator should bring some reforms in the asset side so that a balance will be maintained,” joint managing director of Kotak Mahindra Bank, C Jayaram said.

He also said that basic banking experience will change in the next five to 10 years with the advent of technological solutions in the banking sector.

On consolidation in the banking space, Mr Jayaram said consolidation within the public sector banking space should be done for higher productivity.

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Credit flow to MFIs will now improve: Malegam

“Credit flows, perhaps, were waiting for the regulations to be issued. And now that the regulations have been issued, I think there should be adequate credit flow to the microfinance sector,” Mr Malegam told reporters

Mumbai: Credit flow to microfinance institutions (MFI) will be adequate in future as the regulations relating to MFIs have been issued, Member of Financial Sector Legislative Reforms Commission (FSLRC), YH Malegam said on Sunday.

“Credit flows, perhaps, were waiting for the regulations to be issued. And now that the regulations have been issued, I think there should be adequate credit flow to the sector,” Mr Malegam told reporters on the sidelines of ‘Financial Planning Congress 10-11’ organised by Financial Planning Standards Board of India here.

The microfinance sector was thrown into a tizzy last October when Andhra Pradesh issued an ordinance that sought stringent regulation of the industry, following reports of a spate of suicides by harried borrowers. Andhra is the largest MFI market in the country.

Following this, loan recovery slowed to a trickle and banks also refused to offer fresh funds to MFIs. RBI then set up a committee under the chairmanship of Mr Malegam, who submitted his report early this year.

The Malegam Committee came up with its report on MFIs prescribing an interest cap of 24% on lending, creation of NBFC-MFIs along with host of other guidelines.

Referring to overall health of MFI industry, Mr Malegam said, “So far as other state governments (except Andhra Pradesh) are concerned, there is an improvement. Definitely, interest rates have come down. Well run and efficient MFIs are able to operate under the guidelines issued.” 

He, however, conceded that the proposals given by his committee will have less impact in Andhra Pradesh.

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SEBI wants listed companies to be ethical, but no to policing

SEBI, which regulates thousands of listed companies as well as hundreds of other market entities like brokers, merchant banks and ratings agencies, has informed its board that it cannot adopt a private sector role similar to that of the CVC for government entities. Instead, it wants listed entities to follow a nine-point disclosure norm against non-ethical business practices

New Delhi: Rejecting the idea of assuming a Central Vigilance Commission (CVC)-like role of an anti-corruption watchdog for the private sector, capital market regulator Securities and Exchange Board of India (SEBI) has said it wants listed entities to follow a nine-point disclosure norm against non-ethical business practices instead, reports PTI.

SEBI, which regulates thousands of listed companies as well as hundreds of other market entities like brokers, merchant banks and ratings agencies, has informed its board that it cannot adopt a private sector role similar to that of the CVC for government entities.

In a memorandum submitted to its board at its last meeting on 24th November, SEBI said a CVC-like role “is not within the mandate of SEBI under the existing legal framework”.

At the same board meeting, SEBI approved a new disclosure-based regime for listed companies with respect to non-ethical business practices.

As per the decision, companies would need to submit a ‘Business Responsibility Report’, along with their annual reports, to help assess the fulfilment of their environmental, social and the corporate governance responsibilities.

These disclosures, which SEBI has proposed to be based on nine key principles of responsible, transparent and ethical business practices, would initially apply to the top 100 companies.

Regarding the adoption of a CVC-like role in respect of activities of private sector companies, SEBI said its jurisdiction extends to listed companies in the private sector on certain matters delegated under the Companies Act.

“Further, SEBI has been established to protect the interest of investors in securities and to promote the development of, and to regulate, the securities market as enshrined in the SEBI Act,” the regulator told its board.

The matter came up for discussion in the backdrop of a proposal to SEBI by Transparency International, a global civil society organisation working against corruption, for exploring the possibility of SEBI performing a CVC-like role with respect to the activities of private companies.

The CVC was set up by the government with a mandate to inquire into offences alleged to have been committed under the Prevention of Corruption Act by certain categories of central government employees, corporations established by or under any Central Act, government companies and other entities owned and controlled by the central government.

SEBI said that Transparency International India (TII) was also working toward eradication of corruption by “bringing together relevant players from government, civil society, business and the media to promote transparency in elections, in public administration, in procurement and in business.”

In a letter sent to SEBI in July, inviting the regulator to participate in a Conference on Ethics in Business, TII had suggested exploring the possibility of SEBI performing a role similar to the CVC with regard to the activities of private sector firms.

SEBI participated in the conference, held in August.

SEBI said the conference was focused on the performance of Integrity Pacts (IP), a tool developed by TII for preventing corruption in public contracting.

An IP is an agreement between a government agency and all the bidders for a public contract and lays down each parties' rights and obligations for prevention of bribery and other corrupt practices.

This tool also introduces a monitoring system with the approval of the CVC that provides for independent oversight and accountability.

SEBI told its board that it was also informed by the TII representatives about their initiatives for extending the principles of business ethics and adoption of IP by corporates in private sector in their business dealings.

SEBI also noted that the “CVC has issued various circulars emphasising the necessity of adopting IP in government organisations in their major procurement activities."

However, in view of the limited procurement activities of public sector banks, insurance companies and financial institutions, these organisations were exempted from the IPs.

Noting that SEBI, being a government organisation, was covered under the said circulars of the CVC, the board was told “... the fact remains that SEBI has only very limited procurement activities.”

On the Business Responsibility Report, SEBI told its board that companies were “accountable not merely to their shareholders from a revenue and profitability perspective, but also to the larger society, which is also its stakeholder.”

“Hence, adoption of responsible business practices in the interest of the social set-up and the environment are as vital as their financial and operational performance.

“This is all the more relevant for listed entities, which, considering the fact that they have accessed funds from the public, have an element of public interest involved, and are obligated to make exhaustive continuous disclosures on a regular basis,” the board was informed.

The nine key principles proposed for the new disclosures include the companies’ conduct and governance being based on ethics, transparency and accountability, promotion of the well-being of all employees, respect toward human rights and environmental issues, among others.

They also call for businesses to act responsibly when engaged in influencing public and regulatory policy.

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